Expectational Coordination Failures and Market Volatility

Roger Guesnerie

in Rethinking Expectations

Published by Princeton University Press

Published in print January 2013 | ISBN: 9780691155234
Published online October 2017 | e-ISBN: 9781400846450
Expectational Coordination Failures and Market Volatility

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This chapter examines one line of criticism of the Rational Expectations Hypothesis (REH): expectational coordination failures. It begins by addressing the question of what went wrong with standard economic theory in general and with its modeling principles in particular and offers three answers relating to the diversification of modeling, the rationality hypothesis, and expectational coordination. It then considers the rise of REH in modern economic theory before discussing three avenues of criticism against REH: internal challenges, external criticisms, and criticism based on real-time learning. It also explains how a critical assessment of REH in different contexts changes the standard (REH-based) economic intuition, focusing on the question of the value of new financial instruments; the informational efficiency of the market; and the “good” expectational coordination that Real Business Cycles (RBC)-like models.

Keywords: expectational coordination; Rational Expectations Hypothesis; economic theory; rationality; real-time learning; financial instruments; informational efficiency; Real Business Cycles

Chapter.  8004 words. 

Subjects: Macroeconomics and Monetary Economics

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